Friday, 31 July 2015

BOJ’s Ishida warns of stimulus costs, future imbalances

The Bank of Japan must be vigilant to the risk its massive stimulus programme could overheat the economy and create financial imbalances, board member Koji Ishida said on Thursday.

The former banking executive said he saw no immediate signs the central bank’s aggressive money printing was sowing the seeds of an asset bubble, and that such risks were something to worry about in the long-term.

But his warning about the rising costs of the BOJ’s aggressive money printing contrasts with the views of Governor Haruhiko Kuroda, who has mostly dismissed such risks and talked up the near-term benefits of the stimulus programme.

“It’s necessary to look carefully, from a long-term perspective, whether there is no build-up in risks to Japan’s financial system,” Ishida told business leaders in Kyoto, western Japan.

Ishida was among four of the nine board members who voted against the BOJ’s decision to expand stimulus last October to prevent slumping oil prices, and a subsequent slowdown in inflation, from delaying a sustained exit from deflation.

DEEP BOARD RIFT

His comments underscore a deep rift within the BOJ board between members confident of the success of the bank’s stimulus programme, and those becoming increasingly worried about its demerits – such as distorting market functions.

Many BOJ officials see no need to expand stimulus again in the near future. Their view is that inflation, which has ground to a halt due to last year’s oil-price rout, will accelerate toward the BOJ’s 2 percent target by September next year as the economy improves steadily.

Ishida is reluctant to top up asset purchases, even as core consumer inflation – the BOJ’s key price gauge – has ground to a halt.

He said the BOJ must look at various indicators in measuring inflation including one gauge that strips away the effect of housing costs, which have kept falling.

Measured by that index, annual consumer inflation hit 1.5 percent in May, near the BOJ’s target, according to a graph Ishida showed the business leaders.

Ishida was cautious about Japan’s prospects.

China’s economic slowdown and lingering weakness in Asian emerging markets may weigh on Japanese exports, while it is uncertain whether factory output will pick up as recent declines in commodity prices hit raw material firms, he said.

“There’s a risk the recent softness in exports and output may hurt corporate sentiment just when companies were beginning to turn more aggressive on investment,” Ishida said.